Using a Valuation as a Business Planning Tool

When financial advisors think of valuations, they often think of them in relation to mergers and acquisitions. But valuations are useful for more than just determining the value of a practice being bought and sold. They are also a powerful business planning and strategy tool that financial advisors can use to make smarter decisions about their practice.

What makes valuations such a powerful tool is the data that is produced through the practice analysis. A proper valuation doesn’t just generate a fair market value of a practice. It also identifies how a practice is performing in the key drivers of value, especially compared to benchmark firms. A quality valuation shows financial advisors:

• The composition of their client base and how it drives revenue now and in the future. Specifically, the percentage of high-net-worth clients in relation to mid and low-level clients, and the average age of clients.
• Practice profitability. Namely how efficiently a practice is managing expenses compared to revenue.
• How other firms of comparable size rank in key benchmarks, including client composition and profitability.

With this information, advisors can make critical business decisions including but not limited to:

• Which clients to keep and which clients to either sell or transfer to Junior Advisors
• Strategies for marketing to key populations that represent their most profitable clients
• Where to eliminate or reconfigure expenses in order to improve profitability
• Where to increase services or product sales in order to increase revenue and profitability
• If the firm has the right staff size and mix to support the current client list

Additionally, when shared with Associate Advisors, valuations can be a tool for creating discussions around compensation structures and partner buy-in opportunities. The valuation shows Associate Advisors what it takes to make the business grow and be profitable and allows both parties to set realistic expectations about responsibilities and to structure incentives that drive practice value.

As one firm learned, once the team can see the numbers and watch them improve, they are excited to do more. Mckinley-Carter leverages annual valuations to set key financial benchmarks and monitor their progress. Since implementing this process, they have significantly improved their financial position, which has given them clout with lenders for acquisitions and other growth opportunities. It’s also had a positive impact of the firm’s culture and created an ownership mentality among team members. The firm is now largely employee owned and enjoying the benefits of an energized and committed team.

Read the full story about McKinley-Carter here.

As many financial advisory firms engage in end-of-year planning, it is essential that advisors leverage the insights and accountability a valuation provides. Annual valuations allow advisors to gauge their progress while tapping into the objective perspective of a third-party expert. With that, advisors can make critical, high impact decisions to drive their practice forward and increase the value and profitability of the firm over time.